Bringing
Theory to Practice:
Scott, Goetz Lead Nation's Top Team on Law and Economics of Contracts

By Cullen Couch

Last fall, scholars from Europe and the United
States traveled to Charlottesville
to attend
a festschrift honoring the work
of Professors Robert
Scott and Charles
Goetz in the field of
Law and Economics. A festschrift—German for a celebration
in writing—is a presentation of papers by different scholars
in tribute to the work of a colleague whom they admire. In this
instance, the event lauded Scott and Goetz for providing “a
foundation for the remarkable progress in the economic understanding
of contract law over the past two decades.” According to
Professor Scott, while it was a “singular honor” for
him and Professor Goetz, the festschrift was more about the leadership
role that the Law School faculty holds in the field nationwide.

But first, a little history.

In the 1930s a group of legal scholars,
who came to be known as the Realists, began challenging bedrock
principles upon which
our legal system rested. They argued that the law was not some
metaphysical concept certain in its outcome, but instead an unpredictable
system that relied on anticipating correctly how a judge or jury
will decide a given issue. The Realists adopted Oliver Wendell
Holmes’s definition that “the prophecies of what
the courts will do in fact, and nothing more pretentious, are
what I mean by the law.”With this principle in hand, the
Realists wandered far from pure doctrinal scholarship and into
the behavioral sciences and moral theory, seeking to identify
the universal principles shared by the “family of man” that
guide the legal process.

“The Legal Realists essentially challenged the notion
that law was a self-contained discipline derived from first principles,” says
Professor Scott. “They said that law is policy and we have
to ask the question, ‘why are we doing this?’ That
question forces you to look outside the law school to other disciplines
that answer questions about why people behave the way they do,
what are the impacts of certain forces on their behavior, what
are the moral foundations of our society, and the like.”

Some of the more radical members of this
group—historians
number their ranks at around 40—believed that legal doctrines
were irrelevant to a judge’s or jury’s ultimate decision.
Others in the group were more moderate, arguing that courts certainly
started with, and were influenced by, legal rules and principles,
but that background, experience, and context colored their judgment
to a much greater degree.

Whatever the relative differences within
the group, at its core the Realists challenged directly the
American constitutional
system of a government “by the people.” They viewed
with bemused aloofness the laws and regulations created by popularly
elected officials. The Realists advocated adherence instead to
an amorphous body of universal principles that they themselves
found hard to define. They began foundering in their effort to
divine our society’s collective motivations and beliefs
and apply them to goals that they believed the law ought to be
promoting. The Realists’s anti-democratic impulses, not
to mention the shaggy-youth insouciance that their older colleagues
found unseemly, were their eventual undoing. By the late 1940s,
all that remained of the movement was their initial epiphany:
that the law must look beyond itself to understand how and why
it impacts society.

Twenty-five years ago, when the Realists’s
fireworks were but a fading glimmer on the academic horizon,
Professors Scott
and Goetz found themselves converging upon a common scholarly
point. Scott was researching his ideas regarding the behavior
and expectations of parties to a contract, while Goetz, an economist,
was weighing whether to make a career change.

“I came here in 1974,” says Scott, “and
Charlie came the next year. Our relationship developed almost
from the
beginning. He was contemplating a rather dramatic career change
because he was a tenured economics professor at Virginia Tech.
The Law School had invited him to spend a year as a visiting
professor and they invited him to stay as a law professor, which
in those days was quite unusual. Law professors had law degrees,
and he did not.”

“I agonized over the decision for about six weeks,” says
Goetz. “One of the things I had decided—and it
was a good move—was that I was going to give myself five
years to learn enough law that my colleagues would accept me
as being a legal scholar and not just an economist. I thought
the challenge would be to show that the kind of work that Bob
and I did, using economic principles to explain and critique
legal doctrines, could make some contribution in core areas of
law.”

Professor Goetz remembers the day their
professional relationship began. “I was seated in my office down the hallway with
the door open and I heard an argument in the hall between Bob
and Warren Schwarz, who was also an early advocate of Law and
Economics. They were arguing over the economic rationale of the
traditional rule against penalties. Economists had actually been
in favor of the rule against penalties because it prevented what
they call ‘inefficient performances,’ and Schwarz
had just read an article by a couple of economists. He was arguing
with Bob that the penalties doctrine was efficiency-enhancing
and Bob was arguing back. I jumped up and said, ‘Bob’s
right, and what’s more, I can prove it!’”

Goetz went to work and within a day had “created an economic
model that was the basis of our first article on liquidated damages.” Scott
and Goetz together built upon the Realists’s central principle—that
the law must look beyond itself—and wrote the first of
a series of six major articles that Law School Professor George
Triantis calls “path breaking works” in the development
of the Law and Economics movement.

As Director of the John M. Olin Program in Law and Economics
and co-editor of the Journal of Law and
Economics, Triantis is
a noted expert on business law and contracts. His research has
built upon the work of Goetz and Scott, and he leads the effort
at the Law School to promote scholarship in Law and Economics
through workshops and other academic events.

“I think that collection of articles may be the most important
contribution in the Law and Economics of contract in the last
30 years,” says Triantis. “The articles were sustained
contributions to economic methodology. They analyzed a series
of issues in contract law and showed just how powerful the methodology
was.”

Professor Alan Schwartz, Sterling Professor
of Law at Yale Law School, says Goetz and Scott’s work “changed
Contract Law scholarship forever. They made the first sustained
law and
economics analysis of Contract Law. Their work treated every
important subject in the field with insight, thoroughness, and
creativity. The research agenda for the law and economics of
contract is largely their agenda, and just about everything that
has been written since they began bears the mark of their influence.”

“Law and Economics has a very powerful way of explaining
certain things,” says Scott. “It deals with incentives
and how people’s behavior is influenced by carrots and
sticks, so to speak, and within certain arenas it allows us to
understand simple notions like deterrence and subsidies.”

Scott doesn’t pursue this theoretical
approach for its own sake. He puts it to work in the minds
of his students so
that they can leave the Law School with a practical understanding
of the likely effect of the advice they will give their future
clients.

“My whole shtick is that theory works.” he says, “If
you understand better how people behave and how the law affects
their behavior, you will be able to predict better how a court
is going to decide the next case.What the Legal Realists essentially
made clear to us is that there is a river underneath the legal
doctrine and you have to understand what’s driving the
legal rules. Then you need to translate your intuition into the
language of the law. You have to be a good linguist so that you
don’t throw around jargon that academics may use in their
law review articles and expect the judge to understand it. But
those concepts are powerful because they explain so much.”

Some critics argue that adherents try
to extend Law and Economics principles too broadly. According
to Scott, that’s a fair
point, but “in the areas that comprise business law, Law
and Economics has emerged as the dominant mode for analyzing
legal problems.”

“Law and economics is often criticized for taking economics
into areas it doesn’t seem to belong,” adds Triantis, “but
I think that’s the nature of the academic exercise. Just
because it doesn’t work in some area doesn’t mean
it was a mistake to try it out.”

Prior to the work of Scott and Goetz,
first-year contracts courses taught the basic rules that governed
transactions between parties,
but not necessarily the reasons underlying them. “There
were a lot of people in law schools during that time who were
hostile to Law and Economics” says Goetz. “They attacked
it as a laissez-faire, grinding-the-faces-of-the-poor kind of
analysis, which is not true at all. There were people who thought
we were letting the devil in through the back door.”

Over time, the simple power of the analysis
gained converts. “Before,
you learned the rule, but nobody told you why the rule was the
way it was,” says Goetz. “One of the things that
began to happen is that people started using these principles
in first-year contracts classes, at least the people who followed
Law and Economics at the University of Virginia. Now, I think
it’s become pretty widespread and accepted.”

The festschrift last fall was an acknowledgment by leading scholars
that Goetz and Scott are seminal figures in a movement that flourished
early at the University of Virginia and has since grown here
as the source of its continuing intellectual drive.

According to Triantis, “the strength of the Law and Economics
tradition at Virginia is not limited to the people who are currently
here, but also former colleagues who have moved on to other schools
and have continued to distinguish themselves. There is this ‘diaspora’ of
Virginia Law and Economics scholars that we’re very proud
of.”

“Just look at some of the data,” adds Scott. “You
go to a law and economics workshop at any other law school and
you’ll get five or six professors and some students. Every
one of the law and economics workshops that George Triantis runs
here will have 16 to 20 professors. So, just in terms of the
numbers of people who are using this as their scholarly framework
and are serious about it as academics, our leadership is undisputed.
Then if you look at the faculty who are here, and put that together
with the faculty who learned their game here and have now gone
to Chicago, Harvard, Yale, Penn, NYU—and the list goes
on—I just don’t think there is any doubt that the
University of Virginia has been the academic breeding ground
for both the first and second generation of law and economics
scholars. I think it is undeniably the best. Or, to put it this
way: Virginia is second to none.”